The High Court of Delhi (“DHC”) recently in a group of arbitration petitions in Lily Packers Private Limited v. Vaisnavi Vijay Umak, (Judgment dated July 11, 2024 in Arbitration Petition No. 1210 of 2023) has held that lock-in provisions in an employment agreement between an employer and employee is enforceable, and would not be in violation of the fundamental rights as enshrined in the Constitution of India. 

Further, the DHC held that disputes relating to a lock-in period in employment agreements are arbitrable in terms of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Facts of the Case:

The Petitioner is in the business of manufacturing and trading of corrugated packaging, sourcing and outsourcing of materials, and had entered into with employment agreements with the defendants respectively, which contained provisions for salary benefits, working hours, other employment conditions, lock-in period, confidentiality clause and data protection clauses.

The issue arose when the defendants provided their resignation in contravention of the lock-in period provisions of their respective employee agreements i.e. before exhausting the term of employment that the defendant had agreed to work in the Petitioner company. 

Issues:

1. Whether a lock-in period in employment contracts is valid in law, or does it violate the fundamental rights enshrined in the Constitution of India?

2. Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the Act, 1996?

Submissions:

The counsel appearing for the Petitioner, submitted that the dispute had arisen out of employment agreements, and the Petitioner had made enormous investments, in training the respective defendants, and thus the lock-in provisions entered into between the parties would be required to be honored. Further, the employment agreements contained a dispute resolution clause specifying arbitration as the dispute resolution method, and therefore, such disputes should have been referred to arbitration.

The learned counsel in ARB.P. 1213/2023, submitted that the present disputes were not arbitrable, and lock-in provisions are in violation of the fundamental rights of life and employment of the Respondent employee, as provided in Article 19 and 21 of the Constitution of India and Section 27 of the Indian Contract Act, 1872.

Findings:

While deciding on the issue as to whether a lock-in period in employment contracts is valid in law, the Bench relied upon The Brahmaputra Tea Co. Ltd. v. Scarth (MANU/WB/0175/1885); Niranjan Shankar Golikari v. Century Spinning And Manufacturing Co. [(1967) SCC OnLine SC]; Percept D’ Mark (India) (P) Ltd. v. Zaheer Khan & Anr. [(2006) 4 SCC 227], and held that in the opinion of the Court, the negative covenant in the form of lock-in period does not violate fundamental rights enshrined in the Constitution.

The Court observed that such clauses and other clauses like pay fixation, emolument benefits, etc. are usually the subject matter of negotiation and any disputes arising out of such clauses would have to be classified as contractual disputes. While there could be certain situations, which could be held to be curtailment of the employee’s right to entitlement, a 3-year lock (as in the instant case) would not qualify as such. Further, such clauses in the employment contracts could be necessary to protect the health of the employer organization by giving it stability, by reducing attrition levels. 

Consequentially, and relying upon BLB Institute of Financial Markets Ltd. v. Ramakar Jha [(2008) SCC OnLine Del 1075] and BLB Institute of Financial Markets Ltd. v. Ramakar Jha [(2008) SCC OnLine Del 1075], the DHC noted that, disputes related to lock-in period which applies during the subsistence of employment contracts, being in the nature of contractual disputes, would be arbitrable in terms of the Arbitration Act. 

Further, considering the prayers of the petitions were related to seeking protection for confidential information, and damages from the defendants, the DHC noted such prayers were within the four corners of the respective employment agreements and would be arbitrable in terms of the Arbitration Act.

Author’s View:

The DHC has concluded, that provisions such as lock-in period are contractual in nature, and unless any terms are unreasonable to the extent that it can be said it violates fundamental rights enshrined in the Constitution, such provisions are enforceable, as well as arbitrable should an arbitration clause exist in such employment agreement.

In our view, a reasonable lock-in period would not be in contravention of Section 27 of the Indian Contract Act, 1872, and therefore, all prospective employees would be better off negotiating lock-in periods at the time of entering into a contractual arrangement.

Please find attached a copy of the judgement. 

This update has been contributed by Soorjya Ganguli (Partner) and Vikram Chaudhuri (Associate).

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